Does Asahi Songwon Colors (NSE:ASAHISONG) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Asahi Songwon Colors Limited (NSE:ASAHISONG) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asahi Songwon Colors

What Is Asahi Songwon Colors's Net Debt?

The image below, which you can click on for greater detail, shows that Asahi Songwon Colors had debt of ₹159.4m at the end of September 2020, a reduction from ₹406.1m over a year. However, it does have ₹118.7m in cash offsetting this, leading to net debt of about ₹40.7m.

How Healthy Is Asahi Songwon Colors' Balance Sheet?

According to the last reported balance sheet, Asahi Songwon Colors had liabilities of ₹430.2m due within 12 months, and liabilities of ₹249.3m due beyond 12 months. On the other hand, it had cash of ₹118.7m and ₹445.1m worth of receivables due within a year. So it has liabilities totalling ₹115.7m more than its cash and near-term receivables, combined.

Of course, Asahi Songwon Colors has a market capitalization of ₹2.91b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Asahi Songwon Colors has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.084 times EBITDA and EBIT covering interest a whopping 24.4 times, it's clear that Asahi Songwon Colors is not a desperate borrower. So relative to past earnings, the debt load seems trivial. On top of that, Asahi Songwon Colors grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Asahi Songwon Colors will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Asahi Songwon Colors produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Asahi Songwon Colors's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! Overall, we don't think Asahi Songwon Colors is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Asahi Songwon Colors that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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